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Division 7a in detail

Business owners sometimes borrow money from their own company for a variety of personal and financial reasons. However, there can be an issue with tax law compliance if the proper steps are not carried out in treating the transaction correctly.

Division 7a is an integrity measure of tax legislation that comes into effect when there is a loan by a company to the business’ owners and associates, i.e. the shareholders of the company. Associates are broadly defined and can include family members and other related entities.

Specifically, this tax law covers any monetary benefits including:

-payments made to a shareholder (or associate) by a private company, including transfers or uses of property for less than market value

-loans made without specific loan agreements

-debt forgiveness

These transactions may come under the Division 7a provisions and as such are treated as assessable unfranked dividends to the shareholder or associate, and are taxed accordingly.

An assessable unfranked dividend means that there are no franking credits available to the recipient, so the franking tax offset will not apply and the recipient will have to pay tax on the dividends at the usual marginal rate.

However, there a few instances in which Division 7a will not apply:

-if the payment is made to a shareholder or associate who is also an employee of the company, than the dividend may be treated as a fringe benefit instead.

-to payments of genuine debts

-if the loan is entered into formally with a written agreement outlining minimum interest rates and maximum term criteria. However, minimum yearly re- payments of the loan are required in order to avoid the amount’s being treated as dividends arising in later years.

-payments or loans excluded by virtue of other tax provisions

Posted on 11 April '14 by , under Tax.

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The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
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  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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